Natural Gas ETFs To Get A Boost?

The energy space has been aided by one catalyst after another this year. First, a cold snap in the U.S., then tension in oil-rich Russia and finally Sunni Islamic militants’ attack in Iraq have pushed up energy prices.

Oil prices shot up most in the recent sessions as Iraq is the second-largest crude producer in OPEC and the fifth largest producer in the world. But natural gas prices are also not far behind given the apprehensions of a supply crunch in oil.

At present, the national average price of gasoline recently touched $3.67 per gallon – the highest since 2008. Thanks to the soaring gasoline prices, natural gas prices could see a run in the coming days.

Weekly gas inventories which represented the lowest level in 11 years this April, indicating a slowdown in replenishment of gas stockpiles, is still lower than the year-ago level and the 5-year average.

As per the latest EIA storage report, though natural gas stockpiles rose 110 billion cubic feet for the week ending June 20, the inventory declined 27.4% from the year-ago level and 31.0% from the five-year average.

Concerted efforts to take the gas stockpiles to the pre-winter level so that the nation could meet demand for next winter, should benefit the companies engaged in exploration and production of natural gas. Now, the new insurgency in the Middle East resulting in higher energy prices should work out in favor of this group of companies.

Market Impact

While the bullish outlook of natural gas prices can always be played via futures, a look at the equity focus should lock in the intrinsic potential better in this case, in our opinion (read: The Key Differences Between Natural Gas ETFs).

First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG) which is made up of gas exploration companies has delivered better returns than United States Natural Gas Fund (NYSEARCA:UNG) with the focus on front month futures and iPath S&P GSCI Crude Oil Index ETN (NYSEARCA:OIL) based on WTI crude oil futures over the past one month. FCG added about 8.13% while OIL and UNG were up about 2.27% and 0.62%, respectively (as of June 26, 2014).

In fact, sufficient supply injections in the past few weeks had an adverse impact on natural gas futures and the relevant ETFs like UNG. UNG lost 2.74% following the release of the latest gas inventory data while FCG was down about 0.26% on the key trading session.

This suggests that FCG may be a safer way to play this often overlooked space in the near term. For these investors, we have highlighted some more details about this First Trust ETF below: